Nov 2, 2015
Executives
John Mills - ICR Kevin Connors - President and CEO Ron Santilli - EVP and CFO
Analysts
Tom Gunderson - Piper Jaffray Anthony Vendetti - Maxim Group Zack Ajzenman - Griffin Securities
Operator
Greetings and welcome to the Cutera Third Quarter 2015 Earnings Conference Call. At this time, all participants are in a listen-only mode.
A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded.
I would now like to turn the conference over to your host, Mr. John Mills of ICR.
Thank you, Mr. Mills, you may begin.
John Mills
Thanks, operator. Welcome to Cutera's third quarter 2015 earnings conference call.
On the call today are Cutera's President and Chief Executive Officer, Kevin Connors; and Executive Vice President and Chief Financial Officer, Ron Santilli. After management's prepared comments, there will be a question-and-answer session.
The discussion today will include forward-looking statements, reflecting management's current forecast or expectations of certain aspects of the company's future business, including any financial guidance provided for modeling purposes. Forward-looking statements are based on current information that is by its nature dynamic and subject to rapid and even abrupt changes.
All forward-looking statements are subject to risks and uncertainties including projected revenue, gross margin, operating expenses, profitability achievements, cash from operations and the impact of foreign currency fluctuations on the company's international business. Such risks and uncertainties are discussed in a summary form in today's press release.
The following prepared remarks and in the Q&A section that follows. A detailed discussion of the risk and uncertainties is stated under the caption Risk Factors in the Company's 10-Q filed today with the SEC.
Cutera also cautions you to not place undue reliance on forward-looking statements, which speak only as of the date they were made. Cutera undertakes no obligation to update publicly any forward-looking statements to reflect new information, events or circumstances after the date they were made or to reflect the occurrence of unanticipated events.
Future results may differ materially from management's current expectations. And with that, I will turn the call over to Kevin.
Go ahead Kevin.
Kevin Connors
Thank you, John. Good afternoon, everyone.
And thanks for joining us today to discuss Cutera's results for the third quarter ended September 30, 2015. We are pleased with the trend in momentum for financial performance improvement as demonstrated by the growth in revenue, improvement in gross margin, operating cash flow and profitability metrics.
Investment in our commercial team, recent product releases and broadening portfolio of acidic solutions have been the key components that have driven our business. Despite continued foreign exchange headwinds, our revenue in the third quarter 2015 increased 23% to $23.1 million when compared to same period last year.
In line with our goal to capture greater market share and expanding market, we've experienced double digit revenue growth during the past five consecutive quarters. It's important to note our growth has been organic and fuel primarily by the recently launched products, strong contribution from legacy platforms and enhanced commercial focus.
Our North American team led by Larry Laber delivered particularly impressive 80% productive revenue growth this quarter. With the past year Larry has assembled an effective team in North America.
As a team continues to develop and gain momentum in the market place, we believe sales force productivity will continue to improve in the fourth quarter and position us favorably for 2016. In addition, we will continue to expand our sales organization to allow us to better showcase our products in the market.
In terms of a customer profile in the quarter, core physicians in North America accounted for approximately 55% of our orders. Our sales team and the rest of the world resume led by Miguel Pardos increased product revenue by 3% on a constant currency basis year-over-year.
Despite currency challenges our Australian direct operation and our global distributor sales channel performed exceptionally well. From product mix perspective, revenue growth was driven from our recent product launches enlighten and excel HR in addition the continue growth and market penetration our gold standard excel V vascular system and our flagship multi application, multi technology zero platform also remained material contributions to our revenue.
enlighten's rapid rise as a top revenue contributor within one year with commercial release is especially noteworthy. This product is well suited for tattoo removal and treatment of benign pigmented lesion and has been well received by our customers.
We are excited about the pipeline's capabilities and plan to induce technologies extensions to the pipeline in 2016. Tha will showcase the versatility of enlighten.
Turning to research and development. We will expand our portfolio products and expect to be able to share more in the coming -- about coming introductions in a near term.
As it has been our tradition, we remain committed to continued investments in product and clinical research and development which are hinged on technical innovation that provide clinical breakthroughs for our customers. The global market for aesthetic laser and energy based system is experiencing healthy expansion which we estimate to be approximately $2 billion per year in equipment revenue.
We've made significant progress thus far in 2015 and are well positioned to leverage our initiatives for next year. I'd now like to turn the call over to Ron to discuss our financial results.
Ron Santilli
Thanks Kevin and thanks to all of you for joining us today on our third quarter 2015 conference call. Third quarter revenue was $23.1 million, up 23% when compared to the third quarter of 2014.
Our year-over-year revenue growth rate during the past five quarters was 11%, 15%, 18%, 27% and 23% respectively. Given the higher baseline performances is evidence by our recent results, we expect our fourth quarter 2015 revenue to be approximately $29 million and a full year 2016 growth rate to be in the range of 10% to 15% year-over-year.
Gross margin was 58%, which is higher than a 57% guidance we previously provided as well as the 57% margin in Q2 of 2015. We have several key initiatives targeted at increasing our gross margin and we're tracking ahead of schedule.
Our margin improvements were due primarily to an increased level of direct revenue and our new product manufacturing cost reductions at a faster rate than previously expected. We expect fourth quarter gross margin to be in a 60% range and we believe we will achieve an annual gross margin of 60% in 2016 starting lower in the first quarter and sequentially increasing throughout the year to more than 60% in the fourth quarter of 2016.
And now I'd like to address our operating results. Sales and marketing expenses decline as a percent of revenue during the quarter as we were able to leverage expenses across higher sales volume.
Expenses were $8.8 million, or 38% of revenue in third quarter of 2015 compared to $7.8 million, or 42% of revenue in the third quarter of 2014. The increase in absolute spending is primarily related to commissions on higher revenue and associated marketing activity.
We expect our sales and marketing expenses to grow moderately in absolute dollars in the fourth quarter 2015 and full year of 2016, but continue to decline as a percent of revenue as we leverage our expenses with our anticipated revenue growth. Research and development expenses were $2.7 million in the third quarter of 2015, similar to $2.6 million in the third quarter of 2014.
We remain committed to continue investments in product and clinical research and development that drive new product innovation. As we enter expense intensive phases in new product development cycle, we project quarterly spending will increase slightly.
Overall, we expect spending to be in the $2.5 million to $3 million per quarter in the future. General and administrative expenses remain flat at $2.9 million in third quarter of 2015 and 2014.
Our general and administrative spending has been in a $3 million range during the past several quarters. We expect expenses to continue in that range and we will realize leverage as a percent of revenue as we anticipate continued revenue growth.
Our net loss for the quarter was $957,000 or $0.07 per diluted share. This includes $1.3 million of non-cash expenses related to stock based compensation, depreciation and intangible amortization.
Please note after adding back these non-cash expenses, we were profitable and cash flow positive for the quarter. We expect to achieve GAAP profitability in the fourth quarter and expect to continue our profitability trends for the full year of 2016.
Turning to the balance sheet and cash flow, net accounts receivable at the end of the third quarter of 2015 were $9 million and our DSOs were 36-days. We expect our DSO to remain in the 35 to 40-day range.
Inventories were $13.5 million at June 30, 2015 and September 30, 2015. This represents annual inventories turns up approximately 3, our objective in 2015 will be to increase our inventory returns closer to the 4 point level.
Cash from operations consumed $614,000 during the quarter due primarily to $960,000 net working capital increase during the quarter due primarily to a normal pay down of operating liabilities and reduction of our deferred revenue balance that resulted from fewer multiyear warranties being sold at the time of sale. We expect to be cash accretive in future quarters as we continue to leverage our revenue growth and we don't expect any significant changes in our working capital assets have been normal quarter-to-quarter fluctuation.
Our cash position remains strong and as of September 30, 2015 we hold cash and investments of $47.7 million with no debt, which represent approximately $3.60 per outstanding share. We concluded our $40 million stock repurchase last month, we commenced this program in February of this year and concluded just a few weeks ago in October.
During this time period, we repurchased and retired 2.8 million shares of our stock. Our Board will continue to evaluate the best use for our strong balance sheet to enhance shareholder value.
In conclusion, we're pleased with the achievement for our revenue growth, gross margin improvement, leveraging of our operating expenses, our cash position and are particularly excited about that we are approaching profitability. For the fourth quarter of 2015 and beyond, while there are certain unpredictable factors that may impact our global business including unfavorable currency movement, we believe we will continue to realize improvements in our financial performance.
We expect our fourth quarter revenue to be approximately $29 million, leverage our operating expenses and to achieve GAAP profitability which will also generate cash from operation. For the full year of 2016, we expect revenue to grow in the range of 10% to 15% on year-over-year basis and to be GAAP profitable and cash accretive.
I'd now like to open up the call to your questions. Operator?
Operator
[Operator Instructions] Our first question is from Tom Gunderson of Piper Jaffray. Please go ahead.
Tom Gunderson
Hi, good afternoon, guys. So just a little bit of clarification around as you are continued to give us good guidance going forward.
When you say and this gets down maybe little bit semantics but when you say approximately $29 million in revenues for Q4, is that a range of $28 million to $30 million and $28.9 million to $29.1 million, when you say approximately what kind of boundaries are you putting around that?
Ron Santilli
Yes, it is a good question. We are just looking at that $29 million and so the value are not large but we don't have any specific guidelines within that but I think the range that you are thinking about is relatively consistent.
Tom Gunderson
$28 million to $30 million
Ron Santilli
Yes.
Tom Gunderson
Okay, all right. And then on the enlighten some like it had another good quarter and another good quarter coming.
What percentage of revenues for enlighten were coming from oUS , any outside of North America?
Kevin Connors
Yes, absolutely. We are saying continued strengthening in Asia particular, we are looking to get more traction in Europe and in that region but clearly it's getting lot of interest around the globe.
Tom Gunderson
Good, thanks. And then Kevin one of the things that Cutera has done well over time is keep their sort of a loyal customer base and you go back and expand the products that they have.
I am curious has enlighten brought new customers in. Have you been able to go into traditional dermatology or plastic surgery offices as far as the core physicians go and maybe steal those guys away from competition?
Kevin Connors
Yes, Tom, it's really a combination of the two. You saw the company since it went public so you know that sometime ago 80% of our business was outside of dermatology and plastic surgery.
And now we have been able to change that is have half of our business are so on an average basis is coming from derm and plastic so we've really been able to pivot the company in terms of our focus to the core physicians as your doctors tend to appreciate disruptive technology and we have to pay what we think a prices for it. And the combination of products like excel V and now with enlighten have allowed us to both go to our existing customers but also make introductions to new one.
Operator
Thank you. Our next question is from Anthony Vendetti of Maxim Group.
Please go ahead.
Anthony Vendetti
Thanks. Kevin I was wondering if you could talk a little bit about the sales force?
I know Larry and Miguel have done a good job but are you looking to add more sales people as you ramp into 2016 and are you looking to direct in any more countries at this point?
Kevin Connors
Yes. We do attempt to continue to add, there are companies in our space that have larger footprint from a sales headcount perspective and we think we've got a strong portfolio products today and more coming and in line with that we think it's important to have story to be told on a grander scale.
So we look to continue to grow our North American business and we think that by yearend we should be somewhere around 50-ish sales reps and we hope to continue that because we as we talked about in call we think the overall market is healthy and we want to capture share so that usually implies more new products and greater focus on the commercial side of business. And a same is true for our Rest of World strategy.
Miguel has done a very nice job, the nine months product sales expansion, Ron you have that number with you in Rest of World.
Ron Santilli
There are actually -- the growth in the Rest of the World, if you look at the nine months situation actually grew 20% even in U.S. dollar despite the approximate 20% decline in the local currencies.
So we've done very well there.
Kevin Connors
Yes. So we just went to ramp in the UK and Ireland and we are direct in Spain and Miguel spent a lot of time building a strategy that gets us continued greater representation outside of North America.
Anthony Vendetti
Okay. And just one follows up on the products.
I know enlighten is selling well. Any other planned wavelength or upper edge to enlighten and then just in general sense, I know you are working on some new products, any type of planned launch in 2016 that we should be looking towards at this point?
Kevin Connors
Well, we talked about the extension of enlighten's capability for the Asian market. And we think that puts us in a very unique position relative to our two major competitors.
But we are very excited about other programs we are actively pursuing to introduce new applications and broader clinical capability that we think are going to make a difference in our business going forward. We are always looking at new platforms as well so it is very busy time with the development team here.
Operator
Thank you. Our final question is from Zack Ajzenman of Griffin Securities.
Please go ahead
Zack Ajzenman
Hi, thanks, good afternoon. I don't want to kind of overlook some of the success and traction here in the U.S.
but turning to international Q1 and Q2 product sales were up 34% and 36% respectively. And this quarter is down 5% or I guess up 3% in constant currency.
Were there some specific reasons for the sharp pull back here in Q3?
Kevin Connors
Other than the commentary which we've already touched on here, we really don't have much more to add. We think that there will be some bumpiness in the revenue but we think Miguel's initiatives have shown nice traction since he joined us last July and we don't see anything from a trend perspective that has concerned about our ability to win in a tougher backdrop with the foreign exchange headwinds.
Ron Santilli
Yes. Just to add to that.
We are happy with what's going on in our international operations. And again you are looking at three months periods as opposed to the nine months period and realize there will be fluctuations from quarter-over-quarter but we feel good about what's happening.
Zack Ajzenman
Okay. Any insights if we think about regions abroad Europe versus Asia?
Any color there?
Kevin Connors
In terms of what?
Zack Ajzenman
In terms of overall trends and macros and fundamentals in some specific regions, internationally Europe performing better than Asia or any color along those lines?
Kevin Connors
Well, each country has its own unique circumstances and managing broad range of geographies has its own challenges but fundamentally I think our perspective is that we are not concerned about quarterly move one way to other, if we think the long-term prospects are healthy we go.
Zack Ajzenman
Okay. And then one more also kind of directed towards international business, for enlighten the 532 wavelength expansion to more effectively treat pre --lesion started shipped I believe at the end of Q2, how should we think about the ramp timeline in Asia which represents about third of the business or in another words when will that maybe you be able to offset some of the recent pressure in that region?
Kevin Connors
Recent pressure in the region, still don't follow that question but we think that pigmented lesion market in Asia is bigger than tattoos and other tattoo enable market and we've done some things to build a group of key opinion leaders that are getting clinical experience with this expansion. And we are quite pleased with the positive feedback that we are getting.
So it's -- from clinical side we are able to minimize any unwanted complications in the treatment of this condition. And I'd say we look at that market as a huge install base of earlier technology that we think we can displace and we got a strategy in place to accomplish that.
Operator
Thank you. With that I'd like to turn the conference back over to management for any additional comments.
Kevin Connors
Thank you for participating in our call today. We will be attending many investor conferences and marketing events the fourth quarter.
We look forward to updating to you on our business progress in the fourth quarter of 2015 conference call in February 2016. Good afternoon and thank you for your continued interest in Cutera.
Operator
Thank you. Ladies and gentlemen, this does conclude today's teleconference.
You may disconnect your lines at this time. And thank you for your participation.